My argument for not re-instating the Glass-Steagall act

[Recursion]

This has come up in quite a few threads lately and I just wanted to make my argument. Actually, it's not mine so much as it's Barney Frank's.

First off, the Glass-Steagall act was not "repealed" per se. Its limits on commercial banks are still in place (thank God -- if BoA or Citi had been operating under the rules of investment banks, the bailout would have been ten times as big as it was).

The part that the Gramm-Leach-Bliley act repealed was that holding companies could own both commerical deposit banks and investment banks. So, if they wanted to, Bank of America could have opened an investment or even a proprietary desk as long as its assets and activities were kept separate from the retail deposit bank.

Second, the repeal of G-S was basically recognizing a regulatory fact. Commercial banks had been given waivers to open investment bank operations right and left; the year before the act passed Citi and Smith Barney were given waivers to combine into CitiGroup (it's interesting to note that the one commercial bank that really got into hot water, Citi, was also consolidated before the repeal of Glass-Steagall, and also that Citi was the only major commercial bank before or since to wade into insurance).

Third, with the exception of Citi, the companies that spectacularly failed (Bear, Lehman, AIG) were either investment banks (or essentially "proprietary banks" in Bear's case) or insurance companies that had never crossed the line into commercial banking (or investment banking in the insurance companies' cases).

The insurance companies' underwriting of toxic assets would not have been prevented by Glass-Steagall. The investment banks' overleverage into these assets would not have been prevented by Glass-Steagall. What would have been prevented was the commercial banks' coming to the rescue, as they ended up doing (Merril going to Bank of America, etc.)

Anyways, that's my processing of Barney Frank's office's answer to my letter asking why we don't reinstate Glass-Steagall (I had to use my mom's return address to get him to write back). He convinced me. Your mileage may vary.

[JackRiddler]

1. This is not an argument "against" Glass Steagal but...

an argument for setting up something much stronger than Glass-Steagal, without the loopholes that GS also allowed.

Furthermore, I strongly take issue with your notion that the commercial banks came "to the rescue, as they ended up doing." Merrill went to BoA in a sweetheart deal subsidized by the NY Federal Reserve. BoA rescued nothing, it was a handout to them. Furthermore, BoA was (and probably still is) insolvent, a zombie bank kept afloat by the bailout.

Rather than letting these entities commandeer the Treasury, they should have been liquidated as per the normal procedures.

Watch now as the crash resumes, right after the "landmark" banking regulation.

Furthermore, we can do better than Barney Frank.

[Jim Sagle]

2. Little Timmy Geithner, is that you?

[Recursion]

4. Umm... no. I'm for nationalizing the whole financial sector.

I see no social good in any of these institutions, and I wish they'd just go away and have the government fulfill the (minimal) functions they actually do. I just think Glass-Steagall is a red herring.

[JackRiddler]

7. Okay! We are in agreement!

The way it should be done:

All 50 states establish 3 state banks: for individuals (state workers, mortgage applicants, consumers), small businesses, big businesses and larger development projects.

There is also a national banking system.

The elected/appointed executives of the banks are required to coordinate policy. The mission is three-fold: 1) Conversion to renewable energy sources (including maximizing efficiency and conservation). 2) Creation of a green transport infrastucture (blanket country with cheap rail alternatives, rebuild public transport). 3) Gradual conversion to green farming on a smaller scale (subsidize family farms and collectives instead of agribusiness, encourage local purchasing - these are not to be absolutes!).

Credit unions may be organized freely. Localities may issue community currencies. The market can flourish at the roots.

What do you say?

[Recursion]

8. It will have to start state-by-state

I'm a small-c conservative in that I think big large-scale changes are so disruptive that the cure is often worse than the disease. Pressure state reps to do it, like North Dakota did. (Yes, there will be holdouts. Sucks to live in those states, like with health care.)

Once we had enough working state systems, the federal level could be brought around.

[Jim Sagle]

9. OK, I would have to think that over, but I might end up agreeing.

But I suspect you do know that Barney Frank has the reputation of being a finance industry stooge. The fact that you referred positively toward his argument led me to a mis-conclusion. Sorry.

[NJmaverick]

3. That doesn't sound like an unreasonable position

[phleshdef]

5. If only more DUers stating opinions on this knew what they were talking about...

I've been mostly silent on the financial regulation bill because I don't feel I know enough about it to open my mouth too much. I'm glad some other DUers like yourself actually can cast a light on some of this with some actual information instead of the "OMGZ corporatists are selling us out to Obama's banker buddies" garbage that seems to be coming from the vast majority of criticisms.

[zipplewrath]

6. It gets into the technicalities

Some folks advocating the reinstatement are referring to the idea more than the literal. The argument you are making is very similar to the one that Clinton still makes with respect to his decision to repeal it in the first place (which as you point out is a technically incorrect assertion). The vast majority of people asking for it to be revived are talking more about the larger concept than the specifics. The banks need to be tightly controlled and there need to be clear boundaries to keep the two sides apart and in a threat of crossing over and collapsing each other. Call it what you will, we ain't gettin' that.